Congress plays Santa for the stock market this year with a mega tax package

With Congress playing Santa this week, stocks could rally on until the real Santa rally kicks in on Friday.

Stocks rose Monday ahead of the House’s vote Tuesday on the tax plan, which slices the corporate tax rate to 21 percent and cuts taxes for many individuals. The market’s supercharged rally took the Dow to its record 70th high of the year and the S&P 500 to its 62nd on Monday. The Dow was up 140 points at 24,792, on track for a 25 percent gain for 2017. The S&P 500 was up 14 to a record 2,690, and the Nasdaq rose 58 to a record 6,994.

“We’re at very important thresholds — 25,000 on the Dow. We’re looking at 7,000 on the Nasdaq and close to 2,700 on the S&P. I just sort of throw up my hands and wonder. The trend is your friend until it ends, and you’re sort of wondering when it’s going to end,” said Sam Stovall, chief investment strategist at CFRA.

Stovall said, however, that now with the prospect of the new corporate tax plan, the market is trying to reprice and that’s been a positive force.

“I think a lot of people are assuming, myself included, that none of the tax cuts are built into earnings estimates and the real question is by how much will earnings estimates go up. Right now, earnings are estimated to be at $145 for the S&P as of year-end 2018, and our guesstimate based on GDP growth being better than expected, plus the tax cut, that maybe we end up at $156,” he said.

So the jump in earnings would go from the expected near 11 percent gain to about 20 percent.

The Senate votes on the tax package Wednesday.

According to Wall Street lore, the traditional Santa rally — in the final five trading days of the year, and the first two sessions of the next — would start Friday. Those seven sessions have been positive 78 percent of the time since 1928, according to Ari Wald, technical analyst at Oppenheimer.

Wald said the S&P 500 has gained an average 1.7 percent on those days versus the market’s average 0.2 percent gain for all seven-day periods. In the following three months, if the market had a Santa rally, the S&P has gained an average 2.8 percent, but if Santa’s period was negative, the market declined an average 1.2 percent in the following three months.

“Seasonal studies are secondary confirmation for us. If we’re expecting strength, this is the time to expect it,” said Wald. He said he tries not to make short-term calls, but the momentum is positive. “As we get into this very short window, we think the bull market continues.”

Wald said the record number of highs is typical bull-market behavior. “It’s confirming what we’re seeing in a lot of our indicators, specifically the broad-based internal breadth of the market, the pro-cyclical leadership. The momentum readings are consistent with a strong advance. Add it all up, and we still think it’s a healthy bull market,” he said.

Besides the House vote, markets are watching some economic reports, including housing starts and current account at 8:30 a.m. ET. Earnings are also expected from Carnival, Darden Restaurants, FactSet and Navistar in the morning. FedEx, Red Hat and Micron report after the close.